Credit ratings agency Moody’s has responded positively to the recent decision by the State Bank of Vietnam (SBV) regarding real estate loans but warned banks of greater pressure.

On May 27 the central bank issued Circular No. 06, aimed at tightening its regulations on asset-liability management and real estate loans. “The new rules, while milder than those proposed in February, are credit positive for Vietnamese banks,” Moody’s analysts wrote in a June 2 report, “as they will support liquidity and limit the banks’ exposure to the higher-risk real estate sector.”

Circular No. 06, replacing Circular No. 36, contains some major changes, among which is the central bank’s approval of banks using a maximum ratio of 50 per cent of short-term funding used for loans longer than 12 months by the end of 2016, from 60 per cent currently.

This ratio will be then by reduced to 40 per cent by the end of 2017.

This transition period, according to Moody’s, gives banks time to adjust to the new rule and is longer than that initially proposed in February, which suggested that the maximum ratio be lowered to 40 per cent by the end of this year.

As a result, Moody’s analysts believe, banks with a sizable share of longer-dated loans will have to slow their credit growth or shift their focus to shorter-term loans, which will benefit their liquidity. Alternatively, “the banks can attract longer-term funding to finance longer-term loans, but success in such an endeavor is unlikely because of higher funding costs and intense competition for deposits,” the report stated.

Moody’s also pointed out that among ratios of short-term funding used for loans longer than 12 months, VPBank has the highest, of 43 per cent, followed by VIBank with 40 per cent. “This suggests that these banks have weaker maturity matching of their assets and liabilities than their peers,” Moody’s wrote.

Vietnamese banks: Ratio of short-term funding used for loans longer than 12 months

Source: Moody’s Investors Services and the banks, June 2016

The short-term funding ratio for loans longer than 12 months for State-owned banks and joint stock commercial banks were 34 per cent and 36 per cent, respectively, as at the end of March, according to the SBV.

Circular No. 06 also raises the risk weights for real estate loans to 200 per cent by end of 2016 from 150 per cent currently, an increase that is lower than the 250 per cent suggested in the February proposal. “The increased risk weight is credit positive for the banks, as it will help limit their appetite for lending to this high-risk sector, given their already weak capital ratios,” Moody’s commented.

But it warned that the Vietnamese banks most affected by the higher risk weightings are VPB and SHB, due to their sizeable exposures to the real estate sector. “Their already weak capital ratios reflecting both higher credit costs and rebound in credit growth mean the new guidelines will exert additional pressure,” its analysts noted. “These banks will have to either lower their exposure to the real estate sector or significantly slow their credit expansion.”

Overall, Moody’s analysts believe that the new rules are credit positive for Vietnam’s banking system because it will help moderate credit growth in the system and in particular in the real estate sector.

Vietnam’s real estate sector has historically posed significant risks to banks, with the 2008-2011 credit boom driven by rapid lending to the sector, culminating in heavy losses for the banks. Although credit growth to the real estate sector of around 15 per cent in 2015 was significantly lower than in 2008-2011, it noted, the central bank is taking preemptive steps to limit the banks’ appetite for lending to this high-risk sector.

On May 27 Moody’s also released a report on Hoang Anh Gia Lai (HAGL)’s debt situation, in which it noted the Bank for Investment and Development of Vietnam (BIDV) appears to be the most affected by HAGL’s debt restructuring plan.